A recent blog post by Bob Bergman points up the important differences between how manufacturers and distributors typically reorder product. Since many of our readers are users of Microsoft Dynamics NAV, we felt it worthwhile to pass along the gist of it. The original post can be found here.
When planning for item replenishment, there are two fundamental methods:
- Reorder point (also known as Min/Max and in practical usage sometimes as Kanban)
- MRP (Materials Requirement Planning)
The first is the common method used in distribution, and the second in manufacturing.
The “reorder point” method is most commonly used in the distribution environment. It’s a ‘reactive’ approach: when your inventory gets to a (pre-determined) low point, it recommends a replenishment order. You give the system a reorder point and a reorder quantity, and it alerts you when it’s time to reorder. If the point is 10 and the quantity is 100, then when your inventory gets down to 10 units in stock, it suggests a reorder. Actually, you can tell it to order a fixed quantity, or a quantity sufficient to get you back up to the maximum desired inventory.
Of course, as trends dictate, a user can change the contents of these fields as necessary, often based on some external, periodic calculations.
In a manufacturing environment, on the other hand, MRP employs multiple levels in the production bill (BOM) and replenishment times might be fairly long. MRP is thus ‘proactive’ in that it attempts to predict when you’ll run low, and recommends a replenishment (based on a variety of factors from production times to vendor lead times), so that inventory will arrive at approximately the time you are predicted to run out.
Decisions to purchase, produce, or both, can be made with time sensitivity. On the MRP side, you can set a reorder policy to “Lot-for-Lot” in Dynamics NAV, for example, and then control results based on what you enter into fields for Lot Accumulation Period, Rescheduling Period, and Order Modifiers like Min, Max, and Order Multiples.
The demand for MRP will then come from the combination of your sales orders, production orders and a production forecast. You can then use the NAV Planning Worksheet to calculate and recommend quantities and Delivery Due Dates. The system will also consider demand for the lower level BOM components that MRP will also subsequently plan for.
The devil of course is in the details (and the decisions you make behind them), but that’s the gist of it.